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Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality

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  • Sean Nicholson

    (The Wharton School, University of Pennsylvania)

Abstract

We examine the determinants of biotech-pharmaceutical alliance prices to determine whether the market for alliances is characterized by asymmetric information. We find that inexperienced biotech companies receive substantially discounted payments when forming their first alliance. A jointly developed drug is more likely to advance in clinical trials than a drug developed by a single company, so the first-deal discount is not consistent with the drug's subsequent performance. Biotech companies receive substantially higher valuations from venture capitalists and the public equity market after forming their first alliance, which implies that alliances send a positive signal to prospective investors.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 4 (July)
Pages: 1433-1464

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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1433-1464

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Web page: http://www.journals.uchicago.edu/JB/

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  1. Aghion, Philippe & Tirole, Jean, 1994. "The Management of Innovation," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1185-1209, November.
  2. Lerner, Josh & Merges, Robert P, 1998. "The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(2), pages 125-56, June.
  3. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  4. Josh Lerner & Alexander Tsai, 2000. "Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances," NBER Working Papers 7464, National Bureau of Economic Research, Inc.
  5. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. " Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
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  7. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September.
  8. Yuk-Shee Chan., 1982. "On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Research Program in Finance Working Papers 127, University of California at Berkeley.
  9. Chemmanur, Thomas J, 1993. " The Pricing of Initial Public Offerings: A Dynamic Model with Information Production," Journal of Finance, American Finance Association, vol. 48(1), pages 285-304, March.
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